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Strong & Weak: Aussie To Weaken as Global Risk Appetite Tumbles

Strong & Weak: Aussie To Weaken as Global Risk Appetite Tumbles

2014-03-14 03:37:00
Jeremy Wagner, CEWA-M, Head of Education

Talking Points:

-Trendless market movements could mean AUD selling since it recently found strength

-Lessening global growth especially from China would likely drag AUD lower in the weeks ahead

-Sell Australian Dollar Currency Basket (enroll for demo account at the same link)

With the exception of the last 12 hours, markets have been rather trendless creating some frustration with trend traders. Strong and weak analysis can prove difficult during these conditions if there are no significant breakouts or follow through on those breakouts.

Therefore, today’s currency basket trade intersects the past two week’s trend with a nervous global market concerned seeing risks to growth. As a result, we will place an AUD Sell Basket trade through the Mirror platform.

If Trendless Continues

Trendless markets are when prices are comfortable with where they are at. Therefore, the prices oscillate between a floor and a ceiling without making significant progress in one way or the other. The strategy to trade a trendless market (also known as range) is to buy at the bottom then sell at the top.

Two weeks ago, the AUD buy basket was the best performing currency basket. In a range, one week your best performer eventually evolves into a poor performer as there simply isn’t enough momentum to break the range. What was gained is eventually lost.

If that is the case and IF the trendless market continues, then the gains from two weeks ago are likely going to be given back in the near future.

Forex Strategy: Matching Strong versus Weak

Currency

Up Arrows

Down Arrows

NZD

7

0

CHF

6

1

EUR

5

2

AUD

4

3

JPY

3

4

GBP

1

5

CAD

0

5

USD

0

6

Chart created by DailyFX EDU Robert Warensjo

Middle of the Pack with China’s Growth Slowing

According to our Strong/Weak analysis and resulting chart above, the Aussie is in the middle of the pack. This even incorporates the strength seen two weeks ago which means the AUD has been towards the weaker end of the spectrum.

An additional tail wind towards Aussie weakness is global risk appetite. There are some concerns that global risk appetite will wane resulting from the developments in Ukraine and weaker growth from China.

China specifically weighs heavily with the Australian Dollar due to their trade relationship. From Australia’s perspective, China is their largest export destination. Also, Australia buys the most imports from China. China is about 20-25% of imports into Australia and exports out of Australia.

Therefore, if China’s growth continues to slow down, then that would likely negatively impact the Australian Dollar.

Executing the Trade

Since we anticipate the AUD to experience broad based weakness, we will take a diversified approach and sell the single currency against a basket of currencies. There are several advantages to trading a currency rather than a pair with the largest benefit being diversification.

We will initiate an AUD Sell Basket trade through the Mirror. You can even try this out in a practice account at the same link above.

We will look to risk 2.0% on the trade for a minimum profit objective of 4%.

Good luck with your trading!

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX

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